DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Part 301

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations and removal of temporary regulations.

SUMMARY:

This document contains final regulations relating to disregarded
entities and excise taxes. These regulations also make conforming
changes to the tax liability rule for disregarded entities and the
treatment of entity rule for disregarded entities with respect to
employment taxes. These regulations affect disregarded entities in
general and, in particular, disregarded entities that pay or pay over
certain federal excise taxes or that are required to be registered
by the IRS.

DATES:

Effective Date: These regulations are effective
on October 26, 2011.

Applicability Date: For dates of applicability,
see §§301.7701-2(e)(2), 301.7701-2(e)(5), and 301.7701-2(e)(6).

FOR FURTHER INFORMATION CONTACT:

Michael H. Beker, (202) 622-3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Procedure and Administration
Regulations (26 CFR part 301) under section 7701 of the Internal Revenue
Code (Code).

Temporary regulations (T.D. 9462, 2009-42 I.R.B. 504 [74 FR
46903]) and a cross-reference notice of proposed rulemaking (REG-116614-08,
2009-42 I.R.B. 536 [74 FR 46957]) were published in the Federal Register on September 14, 2009 (the
2009 proposed regulations). On October 14, 2009, corrections to the
temporary regulations (74 FR 52677) and to the cross-reference notice
of proposed rulemaking (74 FR 52708) were published in the Federal Register.

The 2009 proposed regulations clarify that a single-owner eligible
entity that is disregarded as an entity separate from its owner for
any purpose under §301.7701-2, but regarded as an entity for
certain excise tax purposes under §301.7701-2(c)(2)(v), is treated
as a corporation with respect to those excise taxes. In addition,
the 2009 proposed regulations make conforming changes to the tax liability
rule for disregarded entities in §301.7701-2(c)(2)(iii) and the
treatment of entity rule for disregarded entities with respect to
employment taxes in §301.7701-2(c)(2)(iv)(B).

No public hearing was requested or held. One written comment
was received. After consideration of the comment, the proposed regulations
are adopted by this Treasury decision and the temporary regulations
are removed.

Summary of the Comment and Explanation
of Provisions

A. Air transportation excise tax

The commenter asked whether an amount paid to a single-member
limited liability company (SMLLC) by its owner for air transportation
provided to its owner will be deemed to be paid to a separate corporation
and therefore subject to federal transportation excise taxes under
section 4261.

On August 16, 2007, final regulations under §301.7701-2(c)(2)(v)(A)
were published in the Federal Register (T.D. 9356, 2007-2 C.B. 675 [72 FR 45891]) (the 2007 final regulations).
The 2007 final regulations provide that a single-owner eligible entity
that is disregarded as an entity separate from its owner for Federal
tax purposes is treated as a separate entity for certain excise tax
purposes, including Federal tax liabilities imposed by Chapter 33
of the Code. Under this rule, amounts paid after December 31, 2007,
to an SMLLC by its owner for air transportation are subject to the
tax imposed by section 4261. The commenter suggested that the rule
in the 2007 final regulations created a tax liability where one did
not exist before.

Prior to the adoption of the §301.7701-2 regulations in
1997, amounts paid from one state law entity to another for air transportation
were potentially subject to the section 4261 tax, regardless of the
relationship between the entities. See for example, Rev. Ruls. 76-394,
1976-2 C.B. 355, and 70-325, 1970-1 C.B. 231, which involve transportation
between related corporations and between corporations and their shareholders.
Because there are separate and distinct entities in each case, these
rulings hold that payments made from one entity to another for taxable
air transportation are “amounts paid” for purposes of
the section 4261 tax. While section 4282 provides a limited exception
in the case of air transportation excise taxes for certain affiliated
groups that do not offer air transportation services to non-affiliated
members, no exception had been provided prior to 1997 for other situations.

The adoption of the §301.7701-2 regulations in 1997 departed
from this long-standing precedent by making those previously taxable
transactions no longer subject to excise tax when the owner of an
eligible entity elected to be a disregarded entity. The 2007 regulations
merely restored the long-standing and reasonable pre-1997 rule. Accordingly,
the final regulations retain the rule that excise taxes imposed on
amounts paid for covered services (such as air transportation) apply
to amounts paid between state law entities for such services (unless
a statutory exception applies).

B. Indoor tanning services excise tax

After the 2009 proposed regulations were published, section
10907 of the Patient Protection and Affordable Care Act, Public Law
111-148 (124 Stat. 119 (2010)) added new Chapter 49 to the Code, which
contains an excise tax on amounts paid for indoor tanning services
under new section 5000B. The IRS and Treasury Department are aware
of issues relating to the treatment of qualified subchapter S subsidiaries
and single-owner eligible entities that are disregarded as entities
separate from their owners with respect to tax liabilities imposed
by Chapter 49 of the Code. The issues are similar to those addressed
in §301.7701-2(c)(2)(v). Accordingly, the IRS and the Treasury
Department plan to issue regulations addressing the treatment of those
entities with respect to tax liabilities imposed by Chapter 49 of
the Code.

C. Firearms excise tax and harbor maintenance tax

The rules in the final regulations do not apply to the firearms
excise tax administered by the Alcohol and Tobacco Tax and Trade Bureau
(TTB) and the harbor maintenance tax administered by U.S. Customs
and Border Protection (Customs). Rules in 26 CFR part 301 generally
do not apply for purposes of these taxes and taxpayers should not
assume that a single owner entity will be disregarded under applicable
TTB or Customs rules.

Availability of IRS documents

The IRS revenue rulings cited in this preamble are published
in the Internal Revenue Cumulative Bulletin and are available from
the Superintendent of Documents, P.O. Box 371954, Pittsburgh PA, 15250-7954.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to these regulations, and,
because the regulations do not impose a collection of information
on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter
6) does not apply. Pursuant to section 7805(f) of the Code, the proposed
regulations preceding these regulations were submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues
to read in part as follows:

§301.7701-2 Business entities; definitions.

* * * * *

(c) * * *

(2) * * *

(iii) Tax liabilities of certain disregarded entities—(A) In general. An entity that is disregarded
as separate from its owner for any purpose under this section is treated
as an entity separate from its owner for purposes of—

(1) Federal tax liabilities of the entity
with respect to any taxable period for which the entity was not disregarded;

(2) Federal tax liabilities of any other
entity for which the entity is liable; and

(3) Refunds or credits of Federal tax.

(B) Examples. The following examples illustrate
the application of paragraph (c)(2)(iii)(A) of this section:

Example 1. In 2006, X, a domestic corporation
that reports its taxes on a calendar year basis, merges into Z, a
domestic LLC wholly owned by Y that is disregarded as an entity separate
from Y, in a state law merger. X was not a member of a consolidated
group at any time during its taxable year ending in December 2005.
Under the applicable state law, Z is the successor to X and is liable
for all of X’s debts. In 2009, the Internal Revenue Service
(IRS) seeks to extend the period of limitations on assessment for
X’s 2005 taxable year. Because Z is the successor to X and
is liable for X’s 2005 taxes that remain unpaid, Z is the proper
party to sign the consent to extend the period of limitations.

Example 2. The facts are the same as in Example 1, except that in 2007, the IRS determines that
X miscalculated and underreported its income tax liability for 2005.
Because Z is the successor to X and is liable for X’s 2005
taxes that remain unpaid, the deficiency may be assessed against Z
and, in the event that Z fails to pay the liability after notice and
demand, a general tax lien will arise against all of Z’s property
and rights to property.

(iv) * * *

(B) Treatment of entity. An entity that
is disregarded as an entity separate from its owner for any purpose
under this section is treated as a corporation with respect to taxes
imposed under Subtitle C—Employment Taxes and Collection of
Income Tax (Chapters 21, 22, 23, 23A, 24, and 25 of the Internal Revenue
Code).

* * * * *

(v) * * *

(B) Treatment of entity. An entity that
is disregarded as an entity separate from its owner for any purpose
under this section is treated as a corporation with respect to items
described in paragraph (c)(2)(v)(A) of this section.

(C) * * *

Example. * * *

(iv) Assume the same facts as in paragraph (c)(2)(v)(C) Example (i) and (ii) of this section. If LLCB does not
pay the tax on its sale of coal under chapter 32 of the Internal Revenue
Code, any notice of lien the Internal Revenue Service files will be
filed as if LLCB were a corporation.

* * * * *

(e) * * *

(2) Paragraph (c)(2)(iii) of this section applies on and after
September 14, 2009. For rules that apply before September 14, 2009,
see 26 CFR part 301, revised as of April 1, 2009.

* * * * *

(5) * * * However, paragraph (c)(2)(iv)(B) of this section applies
with respect to wages paid on or after September 14, 2009. For rules
that apply before September 14, 2009, see 26 CFR part 301 revised
as of April 1, 2009.

(6)(i) Except as provided in this paragraph (e)(6), paragraph
(c)(2)(v) of this section applies to liabilities imposed and actions
first required or permitted in periods beginning on or after January
1, 2008.

(ii) Paragraphs (c)(2)(v)(B) and (c)(2)(v)(C) Example (iv) of this section apply on and after September 14, 2009.

Note

(Filed by the Office of the Federal Register on October 25,
2011, 8:45 a.m., and published in the issue of the Federal Register
for October 26, 2011, 76 F.R. 66181)

Drafting Information

The principal author of these regulations is Michael H. Beker,
Office of the Associate Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and the Treasury Department
participated in their development.